Gambler's Ruin

An examination of what might be driving the surge in popularity of sports betting.

There’s really no way to put lightly what’s transpiring in the world of gambling right now - business is booming. To many of you, this won’t be a surprising revelation. Sporting events on television have seemingly turned into one giant advertisement for betting - and that’s just the actual games themselves, not to mention the commercial breaks, where beer commercials have been utterly usurped by gambling ads featuring all sorts of athletes and celebrities.

What’s shocking is how abruptly this has taken place. A few years ago it would have been unthinkable to see this kind of publicity for sports gambling. The professional leagues avoided gambling like the plague, lest anyone start questioning the integrity of their game. Now, they seem to have no problem embracing or even straight up promoting it. So what changed? And how did it happen so fast?

First, it makes sense to look at the numbers. In 2022, gross revenue and total money handled by sports betting companies increased 73% and 61% from 2021, which had already been a record year for both metrics. 2023 is on pace to smash those records again:

Data from Legal Sports Report. Visualization by me.

The trend is quite clear, with monthly amounts bet (or handled, from the house’s perspective) at roughly 10x higher than they were just 4 years ago. Note that downward fluctuations during the summer months correspond with the offseason for 3 of 4 major North American sports leagues - the NFL, NBA, and NHL. The cancellation of most live sports from March-July 2020 due to the Covid-19 Pandemic is also noticeable.

The sudden jump in advertisements and promotion for sports gambling started roughly two years ago in 2021. It’s not uncommon now for most of the “analysis” during intermissions or before games to be primarily focused on the odds and the so-called expert picks. Of course, this is a conscious move by the TV networks in exchange for sponsorship by certain gambling companies.

In terms of what’s caused this sudden shift in attitude towards gambling, I believe a multitude of factors over the last five years have all played a role. I will examine each individually in order to explain further the likely impact that it has had on sports betting.

Ease of Access

Simply put, gambling has become a much easier activity to partake in. Gone are the days of having to phone up a “bookie” or physically go to a casino to place bets. Now, it can all be done from a computer or smartphone. In fact, most of the popular sports gambling platforms also have a section for casino games, so it’s effectively an all-encompassing gambling experience in the palm of your hand. Signing up only takes a few minutes, and there are plenty of ways to get funds into your account (traditional currency or even crypto in some cases).

I would liken it to online shopping or food delivery. If something in demand becomes more accessible (i.e., available on your phone), people will generally take advantage of it. A compounding factor was the pandemic, which rendered many activities and services exclusively online for a period of many months. The online gambling platforms were already growing in use, so the pandemic could have very well accelerated this process as it seems to have done for others.

Pandemic or not, the ability to place bets from anywhere at anytime is the common denominator. Of course, ease of access also comes with downsides. It’s certainly less painstaking for minors to evade the safeguards during a one-time signup process than it would be if they tried to enter an actual casino or place in-person bets. Gambling addictions are also on the rise, which in my view is a direct result of online betting. Eliminating the physical restraints of gambling means that the only factor in deciding whether to quit or continue is the self-control of the individual, which varies greatly and is subject to manipulation.

Legalization and Normalization

One of the leading causes of easy access to sports betting is undoubtedly the elimination of legal obstacles in recent years. For example, the Canadian government legalized single game sports betting in 2021. Previously only parlays (bets involving multiple games) were allowed in Canada, and single game bets could only be made using platforms based in other countries.

Now Canadian platforms offer single game options, and 2021 was also around the time that the profusion of gambling ads and partnerships with TV networks and sports leagues began happening. The legalization of single game betting goes beyond just betting on the outcome of single games however. It is also possible to bet on individual events within games, down to the most detailed minutia such as who will score a goal, when the first touchdown will happen, the over/under of receiving yards a player will have, etc. The Super Bowl includes bets of what colour gatorade will be dumped on the winning coach, the outcome of the pregame coin toss, and the first or last song performed during the half time show.

Additionally, live betting has become absolutely huge, and it’s not possible to watch a game anymore without being inundated with “live odds” for not just the final score, but all kinds of other events. I was watching an NBA playoff game the other day and about twice per quarter, a giant popup appeared on the side of the screen asking which player would score the next field goal and how. The live betting feature is obviously massive for platforms because the events available to bet on can materialize in as little as a matter of seconds, then be rinsed and repeated for the entire game.

Another major development in North America with an even bigger impact was the United State Supreme Court decision Murphy v. National Collegiate Athletic Association (2018). This ruling overturned the Professional and Amateur Sports Protection Act (PASPA) which had outright banned most sports betting in the United States since 1992. States can now set their own regulations around sports betting, and most have legalized it in the last five years since the decision. (The chart above actually shows figures from all the months since the overturning of PASPA).

The legalization of sports betting has taken place amongst a broader trend of other “vices” being legalized or at least de-stigmatized. The distribution and use of cannabis was legalized by the Canadian government in 2018, and many US states have done the same since then. Some places, such as British Columbia, have also decriminalized possession of hard drugs in small amounts. I don’t think the timing is a coincidence, and it appears as though public opinion has shifted in the direction of normalizing such activities too.

Economic Conditions

Due to the Covid-19 pandemic, most countries faced the challenge of preventing a major economic disaster. One mitigating factor was the decision of central banks to lower interest rates to basically 0% for nearly two years. This means that for an extended period of time money could be borrowed pretty much for free.

The cryptocurrency boom during the pandemic is often claimed to be a direct result of low interest rates, as cheap money gave people and businesses more room to invest in speculative assets (yes, crypto falls under this category even if that wasn’t the original intent). Since buying speculative assets is also a form of de facto gambling, it’s certainly possible that gambling on sports could have increased as a result of low interest rates.

I’m a bit skeptical of this impact for a few reasons. First, the amount of money spent on gambling was already increasing before 2020. Second, it’s not showing any sign of slowing down as interest rates rise, unlike cryptocurrency prices which have mostly stalled or dropped dramatically. Also, many of the people that bought crypto considered it to be an “investment”, so they were thinking about it in different terms than sports gambling.

Overall, the 0% interest rates probably had more of an effect on the stock market, investments, and speculative assets than it did on the rise of sports gambling, but the effect on the latter is more difficult to quantify.

An Economic Theory of Sports Gambling?

This is mostly conjecture on my part, but it is something I feel is worth examining on this front. One feature of capitalism that’s enabled it to be the dominant economic system for so long is its ability to adapt and evolve. The economy today would be unrecognizable to people from the early industrial period, but it’s nonetheless operating under the same system and logic. The changes have all come from technology and political decisions, and at every stage capitalism has accommodated them.

Two significant trends have occurred in North America over the last 60+ years that illustrate this. First is the shift from a manufacturing economy to a finance, insurance, and real estate dominated economy. Since 1955, manufacturing has dropped from 28% of United States GDP to 10% (the trend is almost identical in Canada). Meanwhile, in this same period finance, insurance, and real estate has grown from 11% of GDP to 21% and now makes up the biggest share of GDP.

The other trend is that of increasing real disposable income per capita, which is a decent benchmark for measuring standard of living. This means that during the economic overhaul of the last six decades, the amount of money people possess for spending has skyrocketed, and therefore the capitalist machine has done its job and successfully morphed in response.

In my view, the shift from an economy of production to one of financial “services” has been a result of the natural progression of capitalism and deliberate political decisions. With economic growth, financial services become more relevant because there is more money to manage and invest. At the same time, manufacturing has been outsourced to the global periphery in order to ostensibly lower prices for consumers (but really, to increase profits) in the developed countries. This is the result of political leaders deciding to embrace and expand globalization.

Where this relates to sports gambling and the legalization of certain other vices mentioned earlier is that it might reflect the non-material based economic expansion necessary to facilitate the continued growth of disposable income. Of course, real disposable income itself is also misleading. While the chart above shows it on a per capita basis, it doesn’t account for economic disparities that have also occurred as a result of the recent economic shift. We are seeing the average across the whole population which on its own reveals nothing about the distribution.

Also, real disposable income is the money left after taxation. A better measure is what’s called real discretionary income, money left over after taxation and necessities (i.e., food and shelter). Rising property costs and higher than normal inflation over the last couple years would have a noticeable effect on real discretionary income but no effect whatsoever on real disposable income.

However, real disposable income per capita suffices for this purpose since it moves approximately in tandem with real discretionary income (and the former is a bit more objective, too). The fact that it’s normalized over the population is also fine since we’re relating it to total money spent on gambling irrespective of who is spending it.

The main point is that the growth of total money available for spending has gone up a lot, so the economy needs to absorb new things that people want to purchase and have the luxury to afford. Because the government receives tax revenue from economic activity, they are willing to legalize if the demand is there and public opinion favours it. It’s also perfectly compatible with how capitalism functions, and it’s consistent with the shift to a more financialized economy because it’s another (albeit risky) way of using your money to make money.

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Hopefully this can provide at least some insight into why the sports gambling industry has grown so much. Without understanding the phenomenon, it’s tough to deal with the externalities it introduces. There are a lot of potential regulations to be put in place including talk of banning advertising, but I think it’s also an activity where education and self-governance by individuals may actually be more effective.

I’m not opposed to legal sports gambling, and I even partake in it occasionally for fun. To me, it’s about understanding implied probabilities and gaining an advantage by identifying outcomes where I feel the odds are being underestimated. This is where I imagine much of the intrigue for sports betting comes from: the sense of control that arises from being able to craft your own outcome(s) to bet on. Sports also seem less random than casino games, but how much they actually differ in this way could be debated endlessly.

Directly related to implied probabilities is expected value, and I like to calculate the expected value of any bet that I plan on making. Of course, you can also compare it with the expected value based on your own intuitive probability for an outcome. If you wanted to dive even deeper, you could also establish a confidence interval of expected values using a range of probabilities.

If there’s going to be less stigma around gambling, then there should also be less stigma around learning about how to do it responsibly. Gaining intuition of statistics and randomness is a part of that process. Money management education would also go a long way, and both these areas apply to a lot more than just gambling.

Legal sports gambling is still in its infancy, so there are going to be lots of kinks that need to be sorted out. Some attempts at solving this problem are bound to fail, but hopefully through a mix of education and regulation we can converge to a spot that maximizes rational and responsible behaviour amongst participants and platforms.